Three steps to a 21st century sales tax

As the General Assembly looks for painless (or low-pain) ways to generate more revenue, it inevitably turns first to the sales tax. The League of Women Voters of South Carolina encourages finding new ways to generate revenue in order to address pressing state needs in education and infrastructure. But we urge that extra revenue be found by broadening the base, not raising the rate.

Raising the rate makes us less competitive with other states for sales and encourages evasion. Broadening the base usually distributes the burden more fairly across income groups, because many of the exempt purchases are used more by middle and upper income households. Broadening the base will also provide those local governments with local sales taxes more revenue to make up some of what they have lost in cuts to state aid to subdivisions. And finally, the penny dedicated to Act 388 property tax relief will generate more revenue, reducing the drain on the state budget to pay for that tax relief.

Broadening the base means taxing things that are now exempt from sales taxes. Yes, we keep looking at groceries and utilities, and there is some revenue to be gleaned there. But there are some other potential revenue sources that haven’t received the attention that they deserve.

One important source is taxing more services. Our state taxes a few services — hotel accommodations, dry cleaning — but other states tax many more than we do. In Hawaii, New Mexico and South Dakota, all services are taxed unless specifically exempt. There are 168 different services that are subject to sales tax in at least one state. South Carolina taxes only 34. Among the more common services subject to retail sales taxes are transportation (including rental cars and airline departures), household services (such as landscaping and lawn care, cleaning, pest control), automotive services (such as repair and cleaning), printing and photography. After adjusting for the difference in the tax rate, New Mexico collects 73 percent more sales tax per capita than South Carolina.

By far the largest place to look for uncollected taxes is the use tax, the companion to sales tax, which is owed on out-of-state purchases, some by catalog, more by internet. Internet sellers with a physical presence in our state are required to collect the tax — WalMart, Target, Sears, Barnes and Noble and now even amazon.com. But other internet companies are not required to collect taxes on internet purchases from S.C. residents. The obstacle is Congress, which does not allow states to require companies without a physical presence in the states to collect their use tax.

The Multistate Tax Commission has been working with states for many years to try to get Congress to lift this restriction, so pressuring our nine members of Congress to address this issue should be a priority.

Competition from internet vendors who don’t have to charge consumers the tax is unfair to our local retailers, who create jobs and pay property and income taxes as well as business license fees. So what’s at stake is not just the loss of an estimated $254 million a year in sales tax revenue. If internet competition drives local retailers out of business, it reduces other state and local revenue as well.

Finally, while it may not raise a whole lot of revenue, a basic fairness issue is the $300 sales tax cap on cars, boats and airplanes. A yacht pays the same sales tax as a bass boat, a private plane the same as a $6,000 used car. No other state has such a bizarre and regressive provision in its sales tax, and it’s time for the General Assembly to stand up to special interests and put these purchases on the same footing as clothing, school supplies and other necessities.

The General Assembly goes through this exercise about every five years, usually with at most a few tweaks to the system. Let’s hope this time will be different.

Dr. Ulbrich is alumni distinguished professor emerita of economics at Clemson University and a member of the board of directors of the League of Women Voters of South Carolina. Her specialty is state and local public finance. Contact her at holleyulbrich@gmail.com.